InformationWeek

"There are more options for consumers now," says Carol Power, an editor at American Banker, an industry newspaper. "You used to open an account and keep it for life, so banks grew very complacent. But the Internet companies are acting very quickly to acquire customers, and banks are afraid of being able to retain customers."

Even Chase admits competitors are sneaking up on its turf and galvanizing its efforts. "A lot of companies are popping up to be intermediaries who could drive financial transactions away from Chase or other banks and toward the banks that customers have deals with," says Ray Fattell, VP of Chase's business-to-business unit. "We're a trusted fiduciary partner. By becoming involved in the business transaction earlier, we protect and extend our franchise."

Chase.com's O'Leary identifies three kinds of Internet ventures: Internet pure plays such as eBay Inc. and Amazon.com Inc., brick-and-mortar companies with online operations such Barnesandnoble.com and Toysrus.com, and a third category O'Leary calls "killer-space deals." This kind of deal brings together the most powerful players in a given market and joins their strengths, brands, and customer bases to offer the most compelling service in the market.

O'Leary places Spectrum in this category along with several other Chase ventures, such as Identrus LLC, a Chase spin-off developing Internet trust and authentication technology for business-to-business financial transactions on the Web. Eight banks have a stake in the venture, including Bank of America, Barclays, Citibank, and Deutsche Bank, and 22 financial institutions have signed on to participate.

"In many respects, what Identrus is about is the ability for banks to compete over the customer relationship," says Identrus CEO Guy Tallent. "But once they've established the relationship, they must enable customers to freely interact over the Internet."

Another killer-space deal is HomeAdvisor Technologies Inc., an online home-loan automation service for HomeAdvisor.com, Microsoft's online home-finance site. The venture is backed by Chase.com and Microsoft, along with the Bank of America, Federal Home Loan Mortgage, GMAC-Residential Funding, and Norwest Mortgage.

Banking consortia have a checkered past. While some cooperative ventures such as automated teller machine networks, card associations, and funds-transfer networks have been successful, others have flopped. Just look at what happened to Integrion Financial Network. The IBM-led venture set out in 1996 to establish standard formats and a common network for Internet banking and E-commerce services among financial institutions. But the consortium dissolved in March. Observers blame its demise on differences among stakeholders, which included IBM, Visa USA, and 17 banks, not including Chase. O'Leary says Integrion failed, in part, because too many banks were involved in its management, and he vows that Chase will limit the number of partners to a handful in its joint ventures.

While there are risks, Chase also stands to gain from investments in independent ventures, including ShopNow.com, E-Credit, and Financial Engines. Last year, Chase Capital Partners, the venture-capital arm of Chase Manhattan, earned $1.4 billion in profits, 26% of Chase's total operating profit. O'Leary, Fattell, and business development VP Frank Tufano talk frequently with Chase Capital Partners to check the pulse of promising Internet startups and the chance to join deals that could benefit the bank's core business.

When Chase.com makes an investment, however, it's looking for a symbiotic relationship, not short-term profit. "Our goal here is to hold on to investments," says Ray Braco, VP of Chase.com's business-to-consumer division. "We want to guarantee their success, because we're going to use their technology in the long term."

For instance, Chase invested $10 million in Intralinks Inc. after Chase's global investment banking unit deployed the company's Internet technology and services to move its paper-intensive loan-syndication business to the Web. Intralinks automates complex, document-intensive financial transactions, such as multiparty loans, by routing documents electronically between lenders. Chase, Intralinks' largest customer, estimates it did 250 loan-syndication deals through Intralinks last year and saved as much as $20 million in printing expenses.

Chase.com eventually plans to take many of its own ventures public, such as the Deloitte & Touche E-procurement marketplace. But the company has cooled on plans to issue a separate stock for Chase.com, something it had discussed last fall. "We have no plans to take Chase.com public at this stage," says O'Leary, a member of InformationWeek's advisory board. "We'll try to create currencies on our underlying ventures. The most important thing right now is execution."

Perhaps Chase heeded the advice of Forrester Research. The analyst firm issued a research brief in December warning that a Chase.com spin-off would be a mistake. "A separate Chase.com, no longer beholden to Chase's traditional lines of business, could prioritize projects and strategies differently than Chase's business units, grinding Chase's Net efforts to a halt," the report states.

Chase has embraced the wisdom that it must have synergy between its Internet ventures and business units. For instance, one source of "deal flow," as O'Leary calls it, comes from within the ranks of the bank itself. While buy-in and coordination with Chase lines of business are fundamental to every deal, business managers are themselves a source of ideas.

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